March 28, 2006

One infrequently used estate planning tool is what is known as a power of appointment. This is not to be confused with a power of attorney, which is a separate and distinct document. The power of appointment allows a person to take a “second look” at the distribution of assets from a will or a trust.

A typical use may be when you execute a will or a trust, leaving everything in trust for your spouse or children. Upon your spouse or child’s death, the balance of the property is intended to revert to other family members. Prior to having these assets revert to second-tier beneficiaries, the first named beneficiary may be given the power to determine the ultimate beneficiaries of those assets. The person granting the power may give broad powers to the designee beneficiary, such that he or she may give the assets to anyone without any restrictions. This would be known as a general power of appointment.

However, most powers of appointment are special powers of appointment, which limit the class of beneficiaries. This may include the naturally born children and grandchildren of the beneficiary, or, for example, it may be limited to only grandchildren and not great-grandchildren. Very often, limitations are included to insure that the beneficiary’s spouse (in-law) is not to be construed as a member of a class of possible ultimate beneficiaries.

A power of appointment does not have to be exercised, but if it is not exercised specifically within the secondary beneficiary’s will or trust, then the power may lapse, and thus, the beneficiaries under the initial donor’s trust will receive the assets. This is also a consideration when the person who is given a power of appointment predeceases prior to having all assets vested in him or her.

Normally, a general residuary bequest or general provision in a so-called “I Love You” Will does not allow the power of appointment to be exercised, but you must read the governing document carefully to determine what will be required in order to exercise the power of appointment. Naturally, there are also significant tax consequences with the creation of the power of appointment and also with the exercise or non-exercise of it.

March 22, 2006

Certainly, the best time to complete estate planning is when a person is both physically and mentally healthy. However, since many people procrastinate, it is important to understand that there are still techniques available to attend to one’s situation, even when a person is terminally ill. The standard documents are certainly necessary, mainly the healthcare proxy, durable power of attorney and will.

The healthcare proxy and power of attorney will attend to the person’s medical and financial affairs if and when he or she becomes totally incapacitated. In the event that the person is not totally competent, but has also not yet been determined incompetent, then he or she may continue to sign documents. But it is often preferable to have a physician’s statement completed so that there will not be a problem in the future if someone considers contesting the validity of these documents. A physician’s statement may be as general or specific as necessary, but the document will hopefully state that the person who signed the document was of sound and clear mind as of the date of the signing, and although he or she may be on certain medication, these are not mind-altering drugs that cause delusions or an unsound mind.

While the health care proxy and power of attorney attend to the ill person’s affairs in the event of incapacity, a will is the document that becomes operative only upon death. It is normally advantageous to avoid the probate process, and there are several techniques that may be utilized in order to eliminate the need to probate a will. The first would be to consider putting the property in joint names so that the intended beneficiary would be the surviving joint owner. Title will pass by law to the joint owners, and the will may even have a clause which ratifies and confirms the transfer made during the lifetime.

It is also important to verify the beneficiaries of all life insurance, annuities, retirement plans, IRA’s, etc. Since these assets will pass to a named beneficiary without the need for probate, it is important to coordinate these forms with the specific intentions of the ill person. A specific life insurance policy bequest within one’s will may not be effective, since the policy itself is a contract regarding who the company will pay upon the contract holder’s death. Of course, if there is no named beneficiary, then the proceeds will be payable to the estate and distributed pursuant to the terms of the will.

Real estate may also be transferred to joint names or possibly to intended beneficiaries, with the donor reserving the right to live in the property for his or her lifetime. This will also become a nonprobate asset wherein the residual beneficiaries will retain full ownership of the property upon the death of the life tenant.

For stocks and bonds, there is a procedure known as a TOD, or transfer on death account. This basically names a beneficiary of the stock account to receive the assets upon proof of death supplied to the brokerage firm. The brokerage firm merely transfers these assets to a new account in the name of the beneficiaries who are specified by the prior owner on a separate form.

In short, it is possible to prepare an estate plan, even at last minute, for the person who has procrastinated and has now become ill and has limited time. Naturally, there are many other options and alternatives, which may include the use of trusts, but the aforementioned procedures are techniques that may be used for an estate plan with relatively nominal assets and without the expense of creating a trust.

March 15, 2006

As the trend in the United States is to adopt additional rights for couples in same-sex relationships, one thing is certain; things will become more complicated. With various states adopting rules relative to civil unions, same-sex marriages and other legal relationships, several significant issues relative to taxes occur. One primary issue may be the recognition of the relationship for income tax purposes that would allow a couple to file a joint State income tax return, vs. the Federal distinction. The IRS does not permit same sex couples to file jointly even in cases where there is a legal marriage, such as Massachusetts.

The1996 Federal Defense of Marriage Act limits the impact of Civil Unions under Federal law. However estate, tax and long-term care planning, (Medicaid,) become significant issues when determining whether the individual filing a return or requesting an application for governmental assistance will be considered married or single.

Additionally, with the advent of adoptions by same-sex couples and the subsequent dissolution of some relationships, life will certainly become more complicated, and more planning will be necessary. All significant documents must be reviewed to ensure that all plans are in order, and are coordinated with all necessary documents. These include wills, health proxies, powers of attorney, prenuptial agreements and any other legal documents, such as beneficiary designations. It may also be important to review the older generations’ estate planning documents to ensure that both biologically-born children and adopted children are included within their documents.

March 06, 2006

The tax rates and exemption amounts have changed for 2006. Anyone who wants a detailed synopsis of these figures should contact their accountant or personal advisor to determine the proper application as to their personal situation. Naturally, there are exceptions, exemptions, and nuances within the tax laws that are not specifically addressed in the numbers below. These figures are only meant as a guide for reviewing these updated amounts.

March 03, 2006

When an aging parent needs assistance to continue to live at home, many children opt to provide the needed care personally. The caretaker child arrangement begins when either the parent begins residing with the child in the child’s home or the child begins residing, or continues to reside with the parent in the parent’s home, and the child provides the care similar to that of a board and care facility.

When a child is providing care for a parent, it is best to establish a care agreement. This is a contract between the parent and the child, and possibly the child’s spouse, in which the parent agrees to pay the child a monetary sum (in either a lump sum or on an ongoing basis) or to finance an improvement to the child’s home, and the child agrees to care for the parent until either the parent passes away or is no longer able to perform two (2) of the activities of daily living, which include:

Bathing

Eating

Dressing

Transferring

Toileting

Whichever of the above occurs first.

When establishing a care agreement, there are numerous considerations to be addressed, some of which follow. It is necessary to specifically identify and value the services the child will provide as well as the method of payment. In addition, the parent’s “space,” as well as any “common areas,” should be described in detail. The agreement should also set forth whether the parent or the child is responsible for paying the monthly utility charges, such as gas, water and electricity, and the yearly expenses, such as property taxes and homeowner’s insurance. The agreement should specifically state the terms and conditions upon which the parent or the child is allowed to cancel the contract. Any comprehensive care agreement will also address the disposition of the parent’s property upon his or her passing or admission to a nursing home.

The impact of a care agreement with respect to the parent’s long term care financing options is substantial. At present, the most common options for financing long term care include obtaining long term care insurance, privately paying for care or obtaining Medicaid benefits. When applying for Medicaid benefits, the Division of Medical Assistance will ask whether the applicant has made any gifts during the applicable look back period. If gifts are found, the Division of Medical Assistance will assess a penalty upon the applicant. This penalty prevents the applicant from obtaining benefits for a certain time period based on the amount of the gift. When assets are transferred to a child as payment for care provided, it may be possible to avoid any penalty if the parent later needs to apply for Medicaid benefits.